United States Court of Appeals
For the First Circuit
No. 07-2673
RHODE ISLAND HOSPITAL,
Plaintiff, Appellee,
v.
MICHAEL O. LEAVITT, in his capacity as Secretary of Health and
Human Services; DEPARTMENT OF HEALTH AND HUMAN SERVICES,
Defendants, Appellants.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
[Hon. Ernest C. Torres, U.S. District Judge]
Before
Torruella, Baldock,* and Howard,
Circuit Judges.
Robert D. Kamenshine, Appellate Section, Civil Division,
United States Department of Justice, with whom Gregory G. Katsas,
Acting Assistant Attorney General, Robert Clark Corrente, United
States Attorney, Scott R. McIntosh, Appellate Section, Civil
Division, United States Department of Justice, James C. Stansell,
Acting General Counsel, United States Department of Health and
Human Services, Nancy S. Nemon, Chief Counsel, Region I, United
States Department of Health and Human Services, and Clifford M.
Pierce, Assistant Regional Counsel, Region I, United States
Department of Health and Human Services, were on brief, for
appellant.
Robert G. Flanders, with whom Mitchell R. Edwards, Hinckley,
Allen & Snyder LLP, Lawrence W. Vernaglia, and Foley & Lardner LLP
were on brief, for appellee.
*
Of the Tenth Circuit, sitting by designation.
November 17, 2008
BALDOCK, Circuit Judge. Congress established the
Medicare program in 1966 to provide health insurance to the elderly
and disabled. See 42 U.S.C. § 1395 et seq. Part A of that program
covers, inter alia, expenses related to inpatient hospitalization.
The amount Medicare pays for these services is generally determined
under the prospective payment system (PPS). See Robert Wood
Johnson Univ. Hosp. v. Thompson, 297 F.3d 273, 275 (3d Cir. 2002).
Under that system, Medicare reimburses healthcare providers
according to predetermined rates, which correspond primarily to a
patient’s diagnosis at discharge.1 See Bellevue Hosp. Ctr. v.
Leavitt, 443 F.3d 163, 168 (2d Cir. 2006).
Congress recognized, however, that not all inpatient
healthcare costs are created equal. Of particular relevance here,
Congress was concerned that teaching hospitals would incur greater
costs in treating patients than would non-teaching hospitals. See
H.R. Rep. No. 98-25, part 1, at 140 (1983), as reprinted in 1983
1
Under the prospective payment system, Medicare does not
reimburse healthcare providers according to the costs they actually
incur in treating Medicare patients. See Bellevue Hosp. Ctr., 443
F.3d at 168. Rather, Medicare payments are based on predetermined
rates. These rates reflect the resources an efficiently run
hospital, in the same region, would regularly expend in treating a
patient with the same diagnosis at time of discharge. See Robert
Wood Johnson, 297 F.3d at 275-76; Legacy Emanuel Hosp. & Health
Ctr. v. Shalala, 97 F.3d 1261, 1262 (9th Cir. 1996); see also 42
C.F.R. § 412.2. If a hospital treats a given patient for less than
that predetermined rate, it reaps a profit. See Bath Mem’l Hosp.
v. Me. Health Care Fin. Comm’n, 853 F.2d 1007, 1011 (1st Cir.
1988). But if a hospital provides treatment at a higher rate, it
incurs a loss. See id. Thus, the prospective payment system
provides a powerful incentive for providers to maximize the
efficiency of their treatment programs. See Robert Wood Johnson,
297 F.3d at 175.
-3-
U.S.C.C.A.N. 219, 359; S. Rep. No. 98-23, at 52 (1983), as
reprinted in 1983 U.S.C.C.A.N. 143, 192. To remedy this inequity,
Congress established an indirect medical education (IME) adjustment
to increase Medicare payments to acute care teaching hospitals.
See 42 U.S.C. § 1395ww(d)(5)(B).2
The formula Medicare uses to calculate a teaching
hospital’s IME adjustment is fairly complex. See 42 U.S.C.
§ 1395ww(d)(5)(B). For our purposes, it is sufficient to say that
a teaching hospital’s annual IME adjustment is calculated by
multiplying the hospital’s total PPS payments for the fiscal year
by its “teaching adjustment factor.” See id. An important
variable in the calculation of this “teaching adjustment factor” is
a hospital’s ratio of full-time equivalent (FTE) residents to its
total number of beds.3 See id.
A hospital’s total number of beds appears to serve as a
proxy for the size of its medical staff. See County of Los Angeles
v. Leavitt, 521 F.3d 1073, 1076 n.2 (9th Cir. 2008) (citing Little
Co. of Mary Hosp. and Health Care Ctrs. v. Shalala, 165 F.3d 1162,
1164 (7th Cir. 1999)). The higher a hospital’s ratio of FTE
residents to staff, the more teaching each individual staff member
2
This case involves Rhode Island Hospital’s IME adjustment
for the 1996 fiscal year. Both parties agree that we must apply
applicable law as it stood in 1996. Accordingly, all citations in
this opinion, unless otherwise noted, are to the 1996 version of
the United States Code and the Code of Federal Regulations.
3
For brevity’s sake, we use the term “residents” to refer to
both interns and residents throughout this opinion.
-4-
will be doing. See id. Thus, as this ratio increases, so does a
hospital’s “teaching adjustment factor” and, ultimately, the IME
payment a hospital receives from Medicare. See id. at 1076; see
also H.R. Rep. No. 99241, part 1, at 14 (1985), as reprinted in
1986 U.S.C.C.A.N. 579, 592 (noting the increase in a hospital’s IME
payment “var[ies] directly” with its “ratio of interns and
residents to its number of beds”).
The issue in this case is whether governing
administrative and statutory provisions allow the Secretary of the
United States Department of Health and Human Services (the
Secretary) to exclude time that residents spend performing research
unrelated to patient care from a hospital’s FTE count. See 42
C.F.R. § 412.105(g)(1); 42 U.S.C. § 1395ww(d)(5)(B). The district
court answered this question in the negative and the Secretary
appealed. We have jurisdiction to decide this issue under 12
U.S.C. § 1291. Because we conclude the Secretary’s interpretation
of the FTE regulation is permissible, we reverse the ruling of the
district court and remand for further proceedings not inconsistent
with this opinion.
I.
Rhode Island Hospital (RIH or the hospital) is an acute
care facility located in Providence, Rhode Island with a large
graduate medical education program. For the 1996 fiscal year, RIH
requested that its fiscal intermediary — a private insurance
company Medicare contracts to pay certain bills — include 290 FTEs
-5-
in its calculation of the hospital’s IME adjustment. Based on its
conclusion that governing Medicare regulations precluded counting
research time in a hospital’s FTE count, the fiscal intermediary
reduced RIH’s FTE total by 12.06. This exclusion reduced the
hospital’s IME adjustment by approximately one million dollars.
RIH appealed the fiscal intermediary’s decision to the
Provider Reimbursement Review Board (PRRB), which is composed of
“representative[s] of providers” and other persons “knowledgeable
in the field of” provider payments. 42 U.S.C. § 1395oo(h). After
a formal hearing, the PRRB reversed the fiscal intermediary’s
decision. The board concluded the administrative regulation
governing a hospital’s FTE count (the FTE regulation) was
unambiguous and that this regulation did not exclude residents’
purely educational research time from a hospital’s FTE count. See
42 C.F.R. § 412.105(g)(1).
The Secretary, acting through the Administrator of the
Centers for Medicare and Medicaid Services, exercised his right to
review the PRRB’s decision. See 42 U.S.C. § 1395oo(f)(1). After
receiving comments from all interested parties, the Secretary
determined that the IME payment made by Medicare was only intended,
and had historically only been used, to reimburse teaching
hospitals for increased patient care costs. The Secretary also
concluded that residents performing educational research were not
assigned to an eligible area of the hospital under the governing
FTE regulation. Accordingly, the Secretary ruled that the time
-6-
residents spend performing research unrelated to patient care could
not contribute to a teaching hospital’s total number of FTEs.
RIH appealed the Secretary’s decision to the United
States District Court for the District of Rhode Island. See id.
Ultimately, both RIH and the Secretary moved for summary judgment.
In granting RIH’s motion and denying that of the Secretary, the
district court concluded the Secretary had misread the plain
language of the governing FTE regulation. See 42 C.F.R.
§ 412.105(g)(1). The district court also made an alternative
holding that even if the Secretary’s reading of the FTE regulation
was reasonable in the abstract, such a reading was unreasonable in
light of Congress’s purpose in establishing the IME adjustment. On
appeal, the Secretary contests both of these conclusions.
II.
Our review of a district court’s summary judgment ruling
is de novo. See Visiting Nurse Ass’n Gregoria Auffant, Inc. v.
Thompson, 447 F.3d 68, 72 (1st Cir. 2006). We thus apply the same
legal standards that pertain in the district court, affording no
particular deference to that court’s decision. See id. The
strictures of the Administrative Procedure Act (APA) govern
judicial review of the Secretary’s reimbursement determination.
See 42 U.S.C. § 1395oo(f)(1); see also Visiting Nurses Ass’n, 447
F.3d at 72. Accordingly, our review of the Secretary’s ruling is
conducted through the narrow lens of a colored glass. See Visiting
-7-
Nurses Ass’n, 447 F.3d at 72; Strickland v. Comm’r, 48 F.3d 12, 16
(1st Cir. 1995).
Under the APA, agency action is presumptively valid and
we may only overturn an agency decision if it is “arbitrary,
capricious, an abuse of discretion, or otherwise not in accordance
with law.” See Visiting Nurse Ass’n, 447 F.3d at 72 (quoting 5
U.S.C. § 706(2)(A)). This standard precludes a reviewing court
from substituting its own judgment for that of the agency. See
Carcieri v. Kempthorne, 497 F.3d 15, 43 (1st Cir. 2007). Of
course, we will not uphold an administrative decision contrary to
the “unambiguously expressed intent of Congress.” Strickland, 48
F.3d at 16. “If the intent of Congress is clear, that is the end
of the matter . . . .” Id. But in many cases no “unmistakably
clear expression of congressional intent” exists. Id. at 17; see
also United States v. Councilman, 418 F.3d 67, 88 (1st Cir. 2005)
(noting that legislative history is “often murky, ambiguous, and
contradictory” (quoting Exxon Mobil Corp. v. Allapattah Servs.,
Inc., 545 U.S. 546, 568 (2005))).
In these circumstances, courts defer to the views of the
agency Congress has entrusted with relevant rule-making authority,
affording “considerable deference” to the agency’s interpretation
of regulations promulgated under that authority. Royal Siam Corp.
v. Chertoff, 484 F.3d 139, 145 (1st Cir. 2007). Judicial deference
is further magnified in cases involving “complex and highly
technical” administrative programs, such as Medicare. Visiting
-8-
Nurse Ass’n, 447 F.3d at 76; see also Stowell v. Sec’y of Health &
Human Servs., 3 F.3d 539, 544 (1st Cir. 1993) (“Courts should not
cavalierly discount the value of agency expertise painstakingly
garnered in the administration, over time, of [administrative]
programs of remarkable intricacy.”). To receive this deference,
the agency need not “write a rule that serves the statute in the
best or most logical manner; it need only write a rule that flows
rationally from a permissible construction of the statute.”
Strickland, 48 F.3d at 17.
Judicial review under the APA thus consists of
establishing “parameters of rationality within which the agency
must operate.” South Terminal Corp. v. EPA, 504 F.2d 646, 665 (1st
Cir. 1974). So long as an agency’s decision is rational and based
on regulations promulgated after all the requisite “procedural
corners” have been “squarely turned,” we will uphold that decision
provided it does “not collide directly with substantive statutory
commands.” Citizens Awareness Network, Inc. v. U.S. Nuclear
Regulatory Comm’n, 59 F.3d 285, 290 (1st Cir. 1995). We abstain
from this deferential approach only when the agency’s
interpretation of its regulation is “plainly erroneous or
inconsistent with its language.” Visiting Nurse Ass’n, 447 F.3d at
72.
III.
At issue in this case is the Secretary’s reading of
42 C.F.R. § 412.105(g)(1), which sets forth the type of resident
-9-
activities Medicare will include in its calculation of a teaching
hospital’s FTE count. This regulation contains two basic
requirements. First, a resident must “be enrolled in an approved
teaching program.” 42 C.F.R. § 412.105(g)(1)(i). Second, a
resident must “be assigned to one of the following areas:” (1) the
“portion of the hospital subject to the prospective payment
system,” (2) the “outpatient department of the hospital,” or
(3) certain entities under the “ownership or control of the
hospital,” if the hospital incurs “all, or substantially all, of
the costs of the services furnished by those residents.” Id.
§ 412.105(g)(ii). The regulation also provides that FTE status “is
based on the total time necessary to fill a residency slot.” Id.
§ 412.105(g)(1)(iii). Medicare counts a resident “working” in an
ineligible “area” of the hospital as a partial FTE “based on the
proportion of time” he or she is “assigned” to an eligible “area”
of the hospital. Id. § 412.105(g)(1).
The Secretary does not dispute that all of the residents
for which RIH requested FTE credit are enrolled in an approved
teaching program. Rather, the Secretary contends that residents
assigned to perform educational research, i.e. research unrelated
to patient care, are, by definition, not “assigned” to an “area” or
“portion of the hospital subject to the prospective payment
system.” Id. § 412.105(g)(1)(ii). This reading of the FTE
regulation has a certain appeal.
-10-
Medicare utilizes the prospective payment system to pay
hospitals “for operating costs for inpatient hospital services.”
42 C.F.R. § 412.6(a)(1). Although purely educational research
results in additional “operating costs” for teaching hospitals,
those costs are not directly related to “inpatient hospital
services.” Id. As if to make this distinction clear, Congress
specifically excluded the “costs of approved educational
activities” from its definition of the “operating costs of
inpatient hospital services” that are reimbursable by Medicare. 42
U.S.C. § 1395ww(a)(4).
The hospital responds that the FTE regulation does not
require that the work a resident performs be reimbursable under the
prospective payment system. Instead, the regulation mandates that
a resident “be assigned” to an “area” or “portion” of the hospital
that is subject to the prospective payment system. Reading this
language in geographic terms, RIH argues the words “area” and
“portion” simply refer to all units of a hospital complex not
specifically excluded from PPS billing. See American Heritage
Dictionary (4th ed. 2006)(defining “area” as a “roughly bounded
part of the space on a surface; a region”); id. (defining “portion”
as a “section or quantity within a larger thing; a part of a
whole”);4 see also Robert Wood Johnson, 297 F.3d at 275
4
“Dictionaries of the English language are a fundamental
tool in ascertaining the plain meaning of terms used in statutes
and regulations.” United States v. Lachman, 387 F.3d 42, 51 (1st
Cir. 2004).
-11-
(recognizing that Medicare pays for most inpatient services through
the prospective payment system).
Under the hospital’s view, the nature of a resident’s
work is immaterial. As long as a resident is assigned to an area
of the hospital not specifically excluded from PPS billing, that
resident’s work counts towards a hospital’s total number of FTEs.5
See Webster's Revised Unabridged Dictionary (1996) (defining
“assign” as to “to allot; to apportion”); see also 42 C.F.R.
§ 412.25 (addressing hospital units, such as psychiatric and
rehabilitation units, excluded from PPS billing). The Secretary
concedes that the hospital’s interpretation of the FTE regulation
is plausible. At the same time, the Secretary offers a functional
reading of the regulation’s text, which supports his decision to
exclude residents’ purely educational research time from the
hospital’s FTE count.
A cursory review of a dictionary reveals that “assign”
and “area” often have a functional connotation. See American
Heritage Dictionary (4th ed. 2006) (defining “assign” as to “set
apart for a particular purpose,” “select for a duty,” or to “give
out as a task”); id. (defining “area” as a “distinct part or
section, as of a building, set aside for a specific function,” or
a “division of experience, activity, or knowledge”). Accordingly,
5
These excluded units continued to bill Medicare under the
old reasonable cost system. Under this system, a unit’s IME costs
are automatically factored into the payments it receives from
Medicare. See infra Part IV (describing the reasonable cost
billing system).
-12-
the Secretary suggests that to be “assigned” to a “portion” of the
hospital subject to the prospective payment system a resident must
be integrated into a hospital unit dedicated to a form of patient
care subject to PPS billing.6 See Webster's Revised Unabridged
Dictionary (1996) (defining “portion” as a “part considered by
itself, though not actually cut off or separated from the whole”).
The residents at issue in this case were “assigned” to a
research rotation during which they conducted purely educational
research, presumably in a lab. As such, they were not integrated
into a unit of the hospital dedicated to patient care services that
are reimbursable under the prospective payment system.
Accordingly, the Secretary maintains the hours these residents
engaged in purely educational research do not count towards RIH’s
total number of FTEs.
In light of the various definitions of 42 C.F.R.
§ 412.105(g)(1)(ii)’s key terms, neither party’s interpretation of
the FTE regulation is completely beyond the pale.7 Because the FTE
6
The fact that Medicare’s PPS billing applies only to
inpatient (i.e., patient care) services may reasonably be read into
the FTE regulation’s language regarding the prospective payment
system. See 42 C.F.R. § 412.6(a)(1); id. § 412.105(g)(1)(ii)(A).
Accordingly, if one adopts a functional definition of the FTE
regulation’s key terms, one may fairly read that provision as
incorporating a patient care requirement. The hospital’s assertion
that a patient care requirement is unsupported by the FTE
regulation’s text is thus without merit.
7
We recognize that other courts have reached the opposite
conclusion. See Univ. Med. Ctr. Corp. v. Leavitt, No. 05-495, 2007
WL 891195, at *2 (D. Ariz. Mar. 21, 2007) (unpublished); Riverside
Methodist Hosp. v. Thompson, No. C2-02-94, 2003 WL 22658129, at *6
(S.D. Ohio July 31, 2003) (unpublished). For the reasons explained
-13-
regulation’s language “admits of more than one reasonable
interpretation,” it is ambiguous. Gen. Motors Corp. v. Darling’s,
444 F.3d 98, 108 (1st Cir. 2006); see also South Shore Hosp., Inc.
v. Thompson, 308 F.3d 91, 100 (1st Cir. 2002) (refusing to ignore
the “patent ambiguity” of a regulatory provision). We give effect
to an agency’s interpretation of its own ambiguous regulation so
long as that interpretation is reasonable. See Visiting Nurse
Ass’n, 447 F.3d at 72-73. To be reasonable, an agency’s reading of
a regulatory provision must sensibly conform to that regulation’s
wording and purpose. See id.
In this case, we cannot say the Secretary’s
interpretation of the FTE regulation is unnatural or strained.
Hospitals are routinely divided along functional lines. Even a
layperson is readily familiar with, for example, a hospital’s
cardiac unit or its psychiatric ward. See Onujiogu v. United
States, 817 F.2d 3, 5 (1st Cir. 1987) (noting that “the law is not
so struthious as to require courts to ignore the obvious”). These
areas or portions of the hospital are defined by the services, or
types of patient care, they provide. Thus, the Secretary’s
functional reading of the FTE regulation is entirely plausible.8
above, we disagree with their holding that only one reasonable
interpretation of the FTE regulation exists.
8
Acute care hospitals are facilities dedicated to providing
inpatient care. One could logically assume that residents assigned
to such hospitals are engaged in patient-care activities.
Ostensibly, this is one reason why Congress did not include an
explicit patient-care requirement when it established an IME
adjustment for acute care hospitals, but imposed such an explicit
-14-
Our conclusion is not altered by the FTE regulation’s
additional requirement that a resident “be enrolled in an approved
teaching program.” 42 C.F.R. § 412.105(g)(1)(i); see also Skidgel
v. Me. Dep’t of Human Servs., 994 F.2d 930, 937 (1st Cir. 1993)
(recognizing that to determine the meaning of a provision courts
examine its “context” to ascertain that provision’s place in the
greater legal “scheme”). As part of RIH’s approved educational
program, residents must perform scholarly research. The hospital
suggests that it would be anomalous for the FTE regulation to
specifically require a resident be enrolled in an approved teaching
program, and then exclude research time required by that program
from a hospital’s FTE count.
All the text of § 412.105(g)(1)(i) indicates, however, is
that Medicare does not wish to include residents registered in
unapproved, and thus untested, educational programs in a hospital’s
FTE count. Certainly nothing in that section mandates the
Secretary read every element of the FTE regulation in the light
most favorable to a hospital’s approved teaching programs. While
such an interpretation may, or may not, be desirable as a matter of
public policy, “policy choices” are generally “for the agency, not
the court[s], to make.” Associated Fisheries of Me., Inc. v.
requirement when it later extended the adjustment to non-hospital
settings. Compare 42 U.S.C. § 1395ww(d)(5)(B) (2008), with 42
U.S.C. § 1395ww(d)(5)(B)(iv) (2008). Residents assigned to non-
hospital settings, i.e., settings not exclusively dedicated to
patient-care activities, are, by default, more likely to engage in
activities unrelated to the care of patients.
-15-
Daley, 127 F.3d 104, 109 (1st Cir. 1997); see also Strickland, 48
F.3d at 17 (explaining the agency need not adopt the “best” rule,
only a rational one).
The hospital has also failed to demonstrate that adhering
to the Secretary’s reading of 42 C.F.R. § 412.105(g)(1) would
necessarily lead to absurd results. See Dantran, Inc. v. U.S.
Dep’t of Labor, 171 F.3d 58, 65 (1st Cir. 1999) (acknowledging that
courts are reluctant to adhere to an agency’s reading of a
regulation when that reading would “lead to absurd results”). For
example, the hospital claims the Secretary’s interpretation of the
FTE regulation would render a department subject to the prospective
payment system one minute, i.e. when a resident is engaged in
patient care, and not subject to the prospective payment system the
next, i.e. when a resident is engaged in educational research. We
are not presented, however, with a factual scenario in which
residents routinely performed purely educational research while
assigned to patient care units, and no evidence exists in the
record that this is often the case. To the contrary, the record
reflects that the residents at issue here were assigned to a
research rotation, the purpose of which is to provide residents a
concentrated period of time to conduct scholarly research. See,
e.g., Joint Appendix (App.) at 860-70. Thus, the hypothetical
problem posed by the hospital is inapposite. See United States v.
Dickerson, 514 F.3d 60, 65 (1st Cir. 2008) (noting that counsel
-16-
must “present the court with something more than hypotheticals with
no support in the record”).
The hospital also argues that under the Secretary’s
interpretation of the FTE regulation no resident would ever qualify
as a full FTE because all residents are required to participate in
activities, such as educational research and attending classes,
which are unrelated to patient care.9 What the hospital fails to
mention is that a hospital’s Director of Graduate Medical
Education, not Medicare, is the party empowered with determining
the “total time necessary to fill a residency slot.” See 42 C.F.R.
§ 412.105(g)(1)(iii); App. at 10. Presumably, the director could
limit this calculation to the number of work hours required to fill
a single resident position on a hospital’s staffing calendar.10 See
Merriam-Webster Dictionary (2008) (defining “slot” as “an
assignment or job opening; position”).
9
The hospital’s quarrel in this regard reflects more of a
dissatisfaction with the use of the FTE count in determining a
hospital’s IME adjustment than it does any pressing controversy
over the Secretary’s means of determining a hospital’s number of
FTEs. Commentators, as early as 1984, voiced similar concerns. 49
Fed. Reg. 234, 268 (Jan. 3, 1984). For instance, commentators
noted that residents “are students and not employees” and suggested
Medicare count them “on the basis of ‘assigned time’ rather than on
the basis of full-time employee status,” as they believed “payroll
status [was] not an accurate determinant of the number of . . .
residents actually working at [a] hospital.” Id.
10
Indeed, the record suggests the hospital may have limited
its calculation of the total time necessary to fill a residency
slot in some manner. See App. at 1034 (explaining that RIH’s
Director of Medical Education, Dr. John Murphy, testified residents
worked 70-75 hours per week, but a study conducted by the hospital,
in advance of the present suit, indicated residents worked only 50
hours per week).
-17-
As far as educational research is concerned, the record
does not suggest that a resident is assigned to a research rotation
at regular intervals. See, e.g., App. at 25 (mandating that each
resident demonstrate “some form of acceptable scholarly activity”
before the “completion” of his or her training); id. at 58 (“The
curriculum should include resident experience in scholarly activity
prior to completion of the program.”). Hypothetically, Medicare
could, for example, reasonably refuse to count an otherwise “full
time resident” as an FTE during the year in which she fulfilled her
mandatory scholarly research requirement. That resident would then
qualify as an FTE for the remaining term of her residency, as her
work would help to satisfy a hospital’s regular staffing
requirements. We cannot say that such an arrangement would render
the Secretary’s interpretation of the FTE regulation anomalous.11
In sum, 42 C.F.R. § 412.105(g)(1)(ii) is ambiguous. The
Secretary’s reading of that regulation is not plainly erroneous or
inconsistent with its language. See Visiting Nurse Ass’n, 447 F.3d
at 72. Consequently, we will defer to the Secretary’s
interpretation of the FTE regulation unless that interpretation
conflicts with substantive statutory commands or the FTE
11
To be clear, the purpose of the examples we have given is
not to proclaim their accuracy. These hypotheticals merely
demonstrate the hospital’s failure to show that applying the
Secretary’s reading of the FTE regulation would necessarily lead to
absurd results. See Visiting Nurse Ass’n, 447 F.3d at 72 (noting
that, under the APA, courts presume the validity of agency action).
-18-
regulation’s underlying purpose.12 See id. at 72-73; Citizens
Awareness Network, Inc., 59 F.3d at 290; see also La Casa Del
Convaleciente v. Sullivan, 965 F.2d 1175, 1178 (1st Cir. 1992)
(“Deference is particularly appropriate in an area that is as
complex as the field of Medicare reimbursement.”).
IV.
We now turn to the statutory basis for the FTE regulation
at issue. See 42 U.S.C. § 1395ww(d)(5)(B). To cogently discuss
the relevant subsection, we must first examine the IME adjustment’s
history and the means by which the Secretary previously reimbursed
Medicare providers. In general, that entails a discussion of the
reasonable cost billing system, which governed provider payments at
Medicare’s inception.
Under the reasonable cost system, Medicare paid hospitals
the “reasonable cost,” 42 U.S.C. § 1395f(b)(1), of “inpatient
hospital services.” Id. § 1395d(a)(1). Medicare considered a
hospital’s “reasonable cost” to be the cost the hospital “actually
12
The hospital also asserts the Secretary’s functional
interpretation of the FTE regulation is merely a “litigation
position” to which we should not accord deference. See Alliance to
Protect Nantucket Sound, Inc. v. U.S. Dep’t of Army, 398 F.3d 105,
112 n.5 (1st Cir. 2005) (noting that “deference is not due to
interpretations that are post hoc rationalizations offered by an
agency seeking to defend past agency action against attack”). What
the hospital fails to appreciate is that the Secretary’s
interpretation of his own regulations in an “administrative
adjudication” is “agency action, not a post hoc rationalization of
it.” Fed. Labor Relations Auth. v. U.S. Dep’t of Navy, 941 F.2d
49, 59 (1st Cir. 1991). No indication exists that the Secretary
“forfeited [his] entitlement to deference here.” Royal Siam Corp.,
484 F.3d at 146.
-19-
incurred,” minus any portion of that cost it deemed “unnecessary in
the efficient delivery of needed health services.” Id.
§ 1395x(v)(1)(A). Because medicare payments were predicated on a
hospital’s actual expenditures, the reasonable cost system
automatically reimbursed teaching hospitals for IME costs related
to their teaching programs. See id.; 48 Fed. Reg. 39,752, 39,778
(Sept. 1, 1983) (noting that “reasonable cost” payments “already
include the indirect costs of medical education”).
Government costs under the pure reasonable cost system,
however, were inordinately high. To save money, Congress
authorized the Secretary to place “limits” on providers’
reimbursements. See 42 U.S.C. § 1395x(v)(1)(A); see also 42 C.F.R.
§ 413.30. These limits reflected Medicare’s estimate of what a
provider should spend “in the efficient delivery of needed health
services.” 42 U.S.C. § 1395x(v)(1)(A). The Secretary promulgated
these cost limits, otherwise known as section 223 limits, in the
Federal Register. See generally 46 Fed. Reg. 48,010 (Sept. 30,
1981); 45 Fed. Reg. 41,868 (June 20, 1980).
Medicare’s new reasonable cost limits failed to take
into account, however, the indirect costs of hospitals’ teaching
programs. See 45 Fed. Reg. 21,582, 21,584 (April 1, 1980).
Consequently, the Secretary established an “automatic adjustment“
to account specifically for teaching hospitals’ increased “general
inpatient routine operating costs.” Id. This adjustment depended
-20-
on the level of a hospital’s “teaching activity.”13 Id. The
greater a hospital’s teaching activity, the greater the increase in
that hospital’s reasonable cost limits. See id. Much like the
present system, a hospital’s level of “teaching activity” depended,
in large part, upon the ratio of its FTE residents to beds. See
id. Under the modified reasonable cost system, however, Medicare
measured a teaching hospitals total number of FTEs simply by
determining the number of eligible residents employed at the
hospital on a prescribed date. See 47 Fed. Reg. 43,296, 43,310
(Sept. 30, 1982); 46 Fed. Reg. 48,010, 48,013 (Sept. 30, 1981); 45
Fed. Reg. 21,582, 21,584 (April 1, 1980).
In 1983, Congress passed legislation establishing the
prospective payment system for Medicare reimbursement, which
largely displaced reasonable cost billing. See Social Security
Amendments of 1983, Pub. L. No. 98-21, § 601, 97 Stat. 65, 149
(1983); see also supra note 1 and accompanying text (describing the
prospective payment system). As part of that legislation, Congress
statutorily adopted the IME adjustment, which the Secretary created
years earlier. The relevant portion of the statute reads: “The
Secretary shall provide for an additional payment amount for [acute
care hospitals] with indirect costs of medical education, in an
amount computed in the same manner as the adjustment for such costs
13
The Secretary’s statistical analysis demonstrated “a high
degree of correlation between a hospital’s level of general
inpatient routine operating costs and the extent of its teaching
activity.” 45 Fed. Reg. 21,582, 21,584 (April 1, 1980); see also
47 Fed. Reg. 43,296, 43,302 (Sept. 30, 1982).
-21-
under regulations (in effect as of January 1, 1983) under
subsection (a)(2) of this section . . . .”14 42 U.S.C.
§ 1395ww(d)(5)(B).
Under the modified reasonable cost system, the Secretary
instituted the IME adjustment through notices published in the
Federal Register. None of these notices appeared, however, in the
Code of Federal Regulations. Therefore, we are immediately faced
with an ambiguity in the statute’s text. See id.
A “regulation” is often defined as a generally applicable
statement that has the legal effect of binding an agency or other
parties. See,e.g., Kennecott Utah Copper Corp. v. U.S. Dep’t of
Interior, 88 F.3d 1191, 1207 (D.C. Cir. 1996). By law, the
Director of the Federal Register is required to publish each
federal regulation of “general applicability and legal effect” in
the Code of Federal Regulations. 1 C.F.R. § 8.1 (2008); see also
44 U.S.C. § 1510 (defining the “Code of Federal Regulations” as a
“complete codification[] of the documents of each agency of the
Government having general applicability and legal effect”).
Because the IME provisions the Secretary promulgated under the
modified reasonable cost system were not included in the Code of
Federal Regulations, the Secretary now suggests no “regulations”
14
Subsection (a)(2) gives the Secretary the authority to
create exemptions, exceptions, and adjustments to the cost limits
Congress mandated in subsection (a)(1). See 42 U.S.C.
§ 1395ww(a)(2).
-22-
were in effect, under subsection (a)(2), as of January 1, 1983.
See 42 U.S.C. § 1395ww(d)(5)(B).
We need not speculate in this regard. The statute’s
legislative history makes clear that Congress intended to create an
adjustment similar to the one the Secretary applied under the
modified reasonable cost system.15 As such, the “regulations”
Congress had in mind were clearly those the Secretary published in
the Federal Register.16 The statutory IME provision thus instructs
the Secretary to “compute[]” a teaching hospital’s IME adjustment
“in the same manner” as the Secretary calculated that adjustment in
January 1, 1983, with certain delineated exceptions. 42 U.S.C.
§ 1395ww(d)(5)(B).
The hospital takes a broad view of the statutory
language. Indeed, it suggests the Secretary is statutorily
required to determine the FTE variable in the IME calculus in the
15
See H.R. Rep. No. 98-25, pt. 1, at 140 (1983), as reprinted
in 1983 U.S.C.C.A.N. 219, 359 (stating that, “with respect to” IME
expenses, the Social Security Amendments of 1983 would provide an
adjustment “equal to twice the teaching adjustment” applied under
the modified reasonable cost system); see also S. Rep. No. 98-23,
at 52 (1983), as reprinted in 1983 U.S.C.C.A.N. 143, 192 (noting
that the Social Security Amendments of 1983 provide for an
adjustment “equal to twice the adjustment used in connection with”
the modified reasonable cost system).
16
The hospital cites the principle that “a reviewing court,
in dealing with a determination or judgment which an administrative
agency alone is authorized to make, must judge the propriety of
such action solely by the grounds invoked by the agency.” Kurzon
v. U.S. Postal Serv., 539 F.2d 788, 792 (1st Cir. 1976) (quoting
SEC v. Chenery Corp., 332 U.S. 194, 196 (1947)). We simply note
that statutory interpretation does not fall within the category of
decision-making that an “agency alone is authorized to make.” Id.
-23-
same manner the Secretary computed that variable in January 1983.
Our reading of the statute’s text and its legislative history,
however, leads us to adopt a narrower view. See United States v.
Charter Int’l Oil Co., 83 F.3d 510, 517 (1st Cir. 1996) (noting
that “where the statute is ambiguous, legislative history may be
considered” (citing Lomas Mortgage, Inc. v. Louis, 82 F.3d 1, 4
(1st Cir. 1996))).
The portion of the statute on which the hospital focuses
its gaze is the introductory paragraph of a subsection that revises
the formula the Secretary used to calculate a hospital’s IME
adjustment under the modified reasonable cost system. See
42 U.S.C. § 1395ww(d)(5)(B). Congress’ prefatory instruction
regarding the computation of the IME adjustment merely directs the
Secretary, as a general matter, to calculate a hospital’s IME
adjustment using the formula instituted under the modified
reasonable cost system. See Oxford English Dictionary (2008)
(defining “compute” as to “determine by . . . mathematical
reckoning, or “to ascertain by a relatively complex calculation”).
Where Congress wished to modify that formula, it laid out a
specific exception to this general rule. See, e.g., 42 U.S.C.
§ 1395ww(d)(5)(B)(ii) (2008).
The legislative history of 42 U.S.C. § 1395ww(d)(5)(B)
supports this reading of the statute’s text. Congress’ main
purpose in addressing the IME adjustment was to increase Medicare’s
-24-
payments to teaching hospitals.17 To effect its will, Congress
altered certain determinate aspects of the formula the Secretary
used to calculate a hospital’s IME payment.18 See supra note 15
(explaining that Congress simply intended the statutory IME formula
to double the value of the teaching adjustment the Secretary used
under the modified reasonable cost system); see also 51 Fed. Reg.
6,755, 6,755 (Feb. 26, 1986) (same); 48 Fed. Reg. 39,752, 39,778
(Sept. 1, 1983) (same).
Nothing in the IME adjustment’s legislative history,
however, suggests Congress wished to abrogate the Secretary’s
authority to regulate the proper calculation of an indeterminate
variable, such as a hospital’s ratio of FTEs to beds, in the IME
equation.19 Indeed, no indication exists that Congress even
17
See supra note 15. Congress eventually determined that
this adjustment was too generous, in that it overestimated teaching
hospitals additional costs in providing inpatient care. See H.R.
Rep. 99-241, part 1, at 14-15 (1985), as reprinted in 1986
U.S.C.C.A.N. 579, 592-93. Accordingly, Congress reduced the level
of the adjustment, thereby saving the federal government $2.9
billion over a three year period. See id.
18
Congress did not choose to alter the indeterminate variable
in the Secretary’s established IME formula reflecting “the ratio of
[a] hospital’s full-time equivalent interns and residents to [its]
beds.” 42 U.S.C. § 1395ww(d)(5)(B)(ii); 47 Fed. Reg. 43296, 43,310
(Sept. 30, 1982); see also 42 U.S.C. § 1395ww(d)(5)(B) (approving,
as a general matter, the formula the Secretary previously used to
calculate the IME adjustment).
19
We reject RIH’s contention that the legislative history of
the Comprehensive Omnibus Budget Reconciliation Act of 1986
supports its restrictive reading of 42 U.S.C. § 1395ww(d)(5)(B) for
much the same reasons we rejected the hospital’s reading of the
statute. In lowering the value of the IME teaching adjustment
factor, Congress stated in a House Report: “The Committee has
stated the specific indirect teaching adjustment formula in the
-25-
considered the nuances involved in determining the FTE eligibility
of residents in teaching hospitals in which two very different
Medicare payment systems are in play. When faced with an
“interpretive issue” of “minor general significance” involving a
“highly technical and complex” statutory provision, we presume
“Congress would have wanted the agency to enjoy a degree of legal
leeway in specifying” that provision’s “scope.” Evans v. Comm’r,
933 F.2d 1, 7 (1st Cir. 1991). Accordingly, we reject the
hospital’s restrictive reading of the statutory text and hold that
Congress has not “directly spoken to the precise question at issue”
here. Carcieri, 497 F.3d at 26.
V.
We have concluded the Secretary’s reading of the FTE
regulation is permissible and that this regulation does not fly in
the face of substantive statutory commands. Still, the hospital
argues the Secretary’s interpretation of his FTE regulation is
counter to congressional policy underlying the statutory provision
law. There is no discretion on the part of the Secretary.” H.R.
Rep. 99-241, part 1, at 15 (1985), as reprinted in 1986
U.S.C.C.A.N. 579, 593. The hospital emphasizes the latter sentence
to the exclusion of the first in arguing the Secretary has no
authority to change the means by which Medicare determines a
hospital’s FTE count. But here again, Congress merely stated that
the Secretary may not alter the IME “formula” Congress established,
thus frustrating congressional efforts to lower hospitals’ IME
payments. Nothing in this language suggests Congress wished to
remove the Secretary’s authority to determine the proper
calculation of an indeterminate variable, such as a hospital’s
ratio of FTE residents to beds, in the statutory equation.
Although Congress had many opportunities to do so, it has “not seen
fit to question” this longstanding “administrative practice.”
Silverman v. Rogers, 437 F.2d 102, 107 (1st Cir. 1970).
-26-
for an IME payment, as well as the administrative rationale for
establishing the FTE regulation in the first place. See FEC v.
Democratic Senatorial Campaign Comm., 454 U.S. 27, 32 (1981)
(instructing lower courts to reject agency interpretations that
“frustrate the policy . . . Congress sought to implement”); Thomas
Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994) (noting that
courts will not defer to the Secretary's interpretation where “an
alternative reading is compelled . . . by other indications of the
Secretary's intent at the time of the regulation's promulgation”).
Accordingly, we proceed to examine the purpose of the IME
adjustment and the FTE regulation at issue.
Congress “specifically excluded” the “direct and indirect
expenses associated with medical education activities” from
reimbursement under the new “prospective payment system.”20 H.R.
Rep. No. 98-25, pt. 1, at 140 (1983), as reprinted in 1983
U.S.C.C.A.N. 219, 359. At the same time, Congress mandated that
the Secretary continue to provide an IME adjustment to reimburse
teaching hospitals for the “indirect costs” of their “medical
education” programs. H.R. Rep. 99-241, pt. 1, at 14 (1985), as
reprinted in 1986 U.S.C.C.A.N. 579, 592. The hospital correctly
20
Medicare continued to reimburse hospitals’ direct medical
education expenses, such as “salaries for residents and teachers
and classroom costs,” on a reasonable cost basis. H.R. Rep. 99-
241, pt. 1, at 14 (1985), as reprinted in 1986 U.S.C.C.A.N. 579,
592; see also H.R. Rep. No. 98-25, pt. 1, at 140 (1983), as
reprinted in 1983 U.S.C.C.A.N. 219, 359; 48 Fed. Reg. 39,752,
39,762 (Sept. 1, 1983) (noting that Medicare would “continue” to
pay direct medical education costs “on a reasonable cost basis”).
-27-
notes that Congress viewed a hospital’s ratio of FTE residents to
beds as a “proxy” or means of estimating various “factors” that
“legitimately increase” teaching hospitals’ costs.21 H.R. Rep. No.
98-25, pt. 1, at 140-41 (1983), as reprinted in 1983 U.S.C.C.A.N.
219, 359-60; S. Rep. No. 98-23, 52 (1983), as reprinted in 1983
U.S.C.C.A.N. 143, 192; see also Oxford English Dictionary (2008)
(defining “proxy” as a “variable that can be used as an indirect
estimate of another variable with which it is correlated”). But
this fact alone, contrary to the hospital’s assertions, tells us
nothing about the type of resident activities Congress desired the
Secretary to include in his calculation of the FTE variable.
The IME adjustment’s legislative and administrative
history, however, indicates the adjustment was intended to
reimburse hospitals for the “increased patient care costs
associated with [their] teaching programs due to such factors as
increased diagnostic testing, increased numbers of procedures
prescribed, higher staffing ratios and a more severely ill patient
population.”22 H.R. Rep. No. 99-241, part 1, at 14 (1985), as
21
A teaching hospital’s IME costs are “defined in terms of
increased operating costs.” 51 Fed. Reg. 6,755, 6,755 (Feb. 26,
1986). These added costs “are not separately identifiable” on a
hospital’s “cost report” or other “accounting records.” Id.
Consequently, Medicare estimates this “incremental” increase in
operating costs by calculating a hospital’s level of “teaching
intensity.” Id. The ratio of a hospital’s FTE residents to beds
is the “proxy” Medicare uses “to measure teaching intensity.” Id.
22
See also H.R. Rep. No. 103-601, pt. 4 (1994), 1994 WL
410617 (suggesting Congress wished VA teaching hospitals to receive
the IME adjustment accorded to other teaching hospitals in light of
“the increased intensity, complexity and, therefore, cost, of
-28-
reprinted in 1986 U.S.C.C.A.N. 579, 592 (emphasis added); 51 Fed.
Reg. 16,772, 16,775 (May 6, 1986) (adding “more detailed medical
records” to this list); see also 51 Fed. Reg. 16,772, 16,775 (May
6, 1986) (noting that Congress established an IME adjustment
computed “in the same manner as the adjustment for those costs
under regulations in effect as of January 1, 1983” and that
“[u]nder those regulations” IME costs were “the increased operating
costs (that is, patient care costs)” associated with hospitals’
approved teaching programs) (emphasis added). Educational research
expenses do not directly increase the costs teaching hospitals
incur in providing patient care. As a result, we cannot say the
Secretary’s reading of the FTE regulation frustrates the policies
Congress sought to implement.
Nor do we conclude the original purpose of the FTE
regulation is at odds with the Secretary’s current reading of that
caring for [these hospitals’] patients”); Richard S. Schweiker,
Report to Congress: Hospital Prospective Payment for Medicare 48
(December 1982) (stating that IME costs “are higher patient care
costs incurred by hospitals with medical education programs” and
noting that the Secretary had developed “an adjustment methodology”
to reimburse “teaching hospitals” for their “higher patient care
costs”); 54 Fed. Reg. 40,286, 40,286 (Sept. 29, 1989) (noting that
hospitals with IME costs receive an additional Medicare payment and
explaining that “‘indirect costs of medical education’ means those
additional operating (that is, patient care) costs incurred by
hospitals” with teaching programs); 51 Fed. Reg. 6,755, 6,755 (Feb.
26, 1986) (“The indirect costs of medical education are increased
operating costs, that is, patient care costs, associated with
teaching programs.”); 45 Fed. Reg. 41,868, 41,869 (June 20, 1980)
(establishing an “automatic upward adjustment” to teaching
hospitals’ cost limits as these hospitals experienced added
“inpatient general routine operating costs generated by [their]
approved internship and residency programs”).
-29-
provision. The requirement that a resident be assigned to an area
of a teaching hospital subject to the prospective payment system is
predicated on the fact that certain hospital units continued to
bill Medicare under the reasonable cost system. See 48 Fed. Reg.
39,752, 39,778 (Sept. 1, 1983). Under the reasonable cost system,
Medicare automatically reimbursed teaching hospitals for their IME
expenses. See id. at 39,754 (noting that “reasonable costs include
all . . . indirect costs that are necessary and proper for the
efficient delivery of needed health services”). To avoid paying
the IME adjustment twice, the Secretary was required to exclude
residents assigned to non-PPS billing (i.e., reasonable cost
billing) units from a hospital’s FTE count. See id. at 39,778
(explaining that the IME adjustment “does not apply” to hospital
units that bill Medicare under the “reasonable cost” system because
Medicare’s “payments to those facilities already include” a
hospital’s IME costs).
Because residents assigned to a research rotation are not
assigned to a reasonable cost billing unit, the hospital argues
their work must count towards a hospital’s total number of FTEs.
We think the scope of the Secretary’s intent in establishing the
FTE regulation should be read more broadly. At base, the Secretary
was not concerned merely with whether a resident was assigned to a
reasonable cost billing unit. The purpose of the FTE regulation
was, instead, to exclude residents from a hospital’s FTE count who
did not contribute to the added costs, which the IME adjustment was
-30-
intended to reimburse. As we have already explained, the IME
adjustment’s legislative and administrative history adequately
support the Secretary’s conclusion that this provision was
intended to compensate teaching hospitals for added costs of
patient care unremunerated by the prospective payment system. The
Secretary’s current reading of the FTE regulation is consistent
with that intent.
Put simply, the Secretary’s interpretation of the FTE
regulation is not “arbitrary, capricious, an abuse of discretion,
or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A).
We therefore “refuse to substitute our judgment” for that of the
Secretary. Natural Res. Def. Council, Inc. v. U.S. E.P.A., 824
F.2d 1258, 1293 (1st Cir. 1987); South Shore Hosp., Inc., 308 F.3d
at 97 (noting that our review, under the APA, is “tightly
circumscribe[d]”). For the above-stated reasons, we reverse the
ruling of the district court and remand for further proceedings not
inconsistent with this opinion.23
23
In the district court, RIH made an alternative argument
that some of its residents’ research time was related to the
treatment or diagnosis of particular patients. Thus, even under
the Secretary’s reading of the FTE regulation, the hospital
maintains this research time should count towards its total number
of FTEs. Because the district court did not reach this claim and
the hospital failed to raise it on appeal, we express no opinion as
to its merits. See In re Keeper of Records (Grand Jury Subpoena
Addressed to XYZ Corp.), 348 F.3d 16, 21 n.4 (1st Cir. 2003).
-31-